Why do we believe in the market?

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notsobright
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Why do we believe in the market?

Post by notsobright »

why are we all so confident that the market will do us right over the long term? What if long term is not on the time span of decades, but of centuries.. What if the next 100 years is a bear market which is then followed by 200 years of bull. In the end, aren't we all just gambling since we don't know for certain what the market will be like? We're all assuming that the market will have positive returns over the course of our lifetimes. Is that a safe assumption?
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Taylor Larimore
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Re: Why do we believe in the market?

Post by Taylor Larimore »

notsobright wrote:why are we all so confident that the market will do us right over the long term? What if long term is not on the time span of decades, but of centuries.. What if the next 100 years is a bear market which is then followed by 200 years of bull. In the end, aren't we all just gambling since we don't know for certain what the market will be like? We're all assuming that the market will have positive returns over the course of our lifetimes. Is that a safe assumption?
notsobright:

Of course, almost nothing is certain.

I look at my investment in the stock market as an investment in thousands of individual companies where millions of people work each day to make their company more profitable (and more valuable). So far, it has worked.

When I started investing in 1950, the S&P stocks were under 20. Today they are over 2,000 (not including dividends). "Assuming that the market will have positive returns over the course of our lifetimes" has been a safe assumption for me.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
sport
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Re: Why do we believe in the market?

Post by sport »

If you want to accumulate enough for retirement, you need to invest in something. Nothing is certain. The stock market is a better and less risky investment that most alternatives. For most people, saving money in the bank is insufficient. If you want safety, you get little return on your investment. If you want good returns, you have to take some risk.
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tetractys
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Re: Why do we believe in the market?

Post by tetractys »

notsobright wrote:In the end, aren't we all just gambling since we don't know for certain what the market will be like?
We're betting on the society we support, on our collective selves, our village.

sis-boom-bah !!! -- Tet
Last edited by tetractys on Sun May 22, 2016 10:37 pm, edited 1 time in total.
AlohaJoe
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Re: Why do we believe in the market?

Post by AlohaJoe »

notsobright wrote:why are we all so confident that the market will do us right over the long term?
On the one hand: why do you think everyone is so confident? This board (and others around the internet) are chock-full on people in various states of anxiety, fear, and terror about the markets. According to a recent survey, at any given time, 1 in 8 Americans think there will be a Great Depression market collapse in the next six-months. So I don't think think people are as confident as you think.

But to actually answer your question: that's basically the entire thrust of Siegel's Stocks for the Long Run and Dimson et al's Triumph of the Optimists. So you should basically read those books :)
boglerdude
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Re: Why do we believe in the market?

Post by boglerdude »

For one thing, the Fed is promising 2% inflation, and the markets increase with inflation ;)
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SimpleGift
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Re: Why do we believe in the market?

Post by SimpleGift »

notsobright wrote:We're all assuming that the market will have positive returns over the course of our lifetimes. Is that a safe assumption?
The fundamental driver of any stock market's advance is the growth of earnings of its constituent companies. While the century-long growth trend of real earnings-per-share for companies globally has been positive, there have been many periods of zero or negative earnings growth. Some declines in profitability have lasted most of a decade, others longer.

To be an equity investor for the long-term, though, one has to have a certain faith in the robustness, creativity and flexibility of global capitalism to overcome and adapt to the challenges of the future. It's this basic confidence in corporate dynamism and the capitalist system worldwide that allows one to invest in stocks for the long haul, I believe. Without this faith, why put one's capital at risk?
Levett
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Re: Why do we believe in the market?

Post by Levett »

I own equities, among other asset classes, because it's an essential (not exclusive) "nutrient" of investing.

The sole question for me is not "belief" but, rather, how much and in what manner?

Not terribly profound, eh?

Lev (long retired)
Ari
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Re: Why do we believe in the market?

Post by Ari »

Nothing about the future is certain. We all know there's a possibility we'll die in traffic, and yet we leave our homes every day. It's a matter of odds and reasonable expectations. As long as companies make money, I'll turn a profit sooner or later. If I have to wait 100 years, I'll wait 100 years. But I doubt it'll come to that.
All in, all the time.
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munemaker
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Re: Why do we believe in the market?

Post by munemaker »

We believe in Santa Claus, the Easter Bunny and Peter Pan, so why not the financial markets?

Successful businesses grow, resulting in returns for those how invest in or loan to them. So what's hard to understand about that?
Ron Scott
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Re: Why do we believe in the market?

Post by Ron Scott »

notsobright wrote:why are we all so confident that the market will do us right over the long term? What if long term is not on the time span of decades, but of centuries.. What if the next 100 years is a bear market which is then followed by 200 years of bull. In the end, aren't we all just gambling since we don't know for certain what the market will be like? We're all assuming that the market will have positive returns over the course of our lifetimes. Is that a safe assumption?
I don't know about 100 years, but I think it is entirely possible that we could have a bear maket long enough in duration that it could badly hurt individuals who start and maintain retirement with a sizeable portion of their net worth in stocks.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.
Da5id
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Re: Why do we believe in the market?

Post by Da5id »

Ron Scott wrote:
notsobright wrote:why are we all so confident that the market will do us right over the long term? What if long term is not on the time span of decades, but of centuries.. What if the next 100 years is a bear market which is then followed by 200 years of bull. In the end, aren't we all just gambling since we don't know for certain what the market will be like? We're all assuming that the market will have positive returns over the course of our lifetimes. Is that a safe assumption?
I don't know about 100 years, but I think it is entirely possible that we could have a bear maket long enough in duration that it could badly hurt individuals who start and maintain retirement with a sizeable portion of their net worth in stocks.
e.g. see Japan...

Anyone thinking there is no risk in the stock market over medium term is not thinking clearly. Not in a "market is overpriced" sense, but stocks are just inherently risky, that is why you get the higher return on average. If the stock market has very long term risk, we have other problems to worry about, as it likely indicates society is also failing...
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Re: Why do we believe in the market?

Post by Shallowpockets »

Stock market is the only game in town. That is why we play. Unless you just keep cash, which is, in part, not a bad idea.
Someone here posted about when they started investing in 1950. Maybe they are 85 now and have looked at 65 years of returns. For most of us I believe it to be a market that has been 'investible' since about 1990. Even then it was not an investing world on a large nor easy scale. You had brokers, trading fees were much higher, funds were fewer, many if them front end load. There was no Internet. You had to follow prices in the newspaper. Now it is much simpler in those regards. Maybe more complex in the choices.

This BH usual long term returns rising and periods of 20-40 years is suspect in light of the above. Now there are so many more investors, so many more funds, companies, etc. although you can look at historical returns going back I believe that some of that does not apply to today's world.
Although the past few years have been a bull market, we only arose out of the big slump in 2008. Now getting back to even for many.
Another thing is that if you are looking ahead from 30-40 years old you have a different perspective on your money than a newly retired person. You can have the long view. If you are still contributing to your savings you can have the long view. The rest of us, not so much. We have our X amount and we see very little movement some recent years. Historically, it may even out to the proverbial 8% a year, but that has not been much of a sure thing since 2000.
Still, the stock market is our only game. Bonds, annuities, these are all predicated on the stock market.
We are captive by this machine. No pensions anymore. So you are either in the dynamic phase and making money, or you are in the static phase and watching your X amount roll around in that machine. We take solace in the longer view or averages. But, we do not know it will go that way, or when.
BogleMelon
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Re: Why do we believe in the market?

Post by BogleMelon »

Let's assume that the market is going to go down the next 100 years. And let's assume that this would mean it is better to keep our money in savings (cash). That means that your money will loose value as well. Companies go down meaning that your money will not find something to buy! I am not an expert in this, so I could get it wrong. Please correct me if so.
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather
BHUser27
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Re: Why do we believe in the market?

Post by BHUser27 »

What will "the market" do in the short-haul?
What will "the market" do in the long-haul?
What will be the value of my stocks be on the day I *have to* convert them into real dollars?
What will the spending power of that dollar be on the day I convert?
How will income taxes impact the value of my investment?
Inflation? Deflation?
War?
Famine?
Global warming?
How stable is my income?
How stable is my career?
Will my family experience a medical emergency?
Fire? Flood? Major catastrophe?

Risk tolerance is a very personal thing. Do not rely *only* on the over-simplified risk calculators found on the interwebz. Especially if you have a unique personal situation. Do your homework.

IMO - some people should not invest in the stock market at all. Some should be "all in".

I do not believe in "the market". I believe that the diversified risk-adjusted portfolio I have created will suit my particular needs for the short-haul and long-haul; regardless of what the stock market does (within a reasonable range of semi-doomsday scenarios).

:sharebeer
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David Jay
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Re: Why do we believe in the market?

Post by David Jay »

notsobright wrote:why are we all so confident that the market will do us right over the long term?
"The market" is ownership of the major companies in this country. I believe that those companies will, in the aggregate, continue to grow, innovate and provide the goods and services that the population wants.

So long term, owning these companies (again, in the aggregate) is a good bet.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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HomerJ
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Re: Why do we believe in the market?

Post by HomerJ »

Human work is turned into profit.

Owning the market means you get a share of those profits.

It's not a closed system. Human work is the input into the system.
protagonist
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Re: Why do we believe in the market?

Post by protagonist »

Notsobright.....I think you are a lot brighter than your name suggests. You are asking the right question.

I don't "believe" in the market (as per the title thread), though I think many here do. I invest in the market because I have to do something with my money, and I am willing to take a certain amount of risk.

We are fortunate to be alive and investing in an era of perhaps greater growth than the world has ever known. You are correct to assume that it can't continue forever. I'm hoping it continues long enough so that I will be rewarded as I have been in the past. It's a gamble, the odds of which nobody really knows.

No assumptions about the future are safe assumptions. If you realize that from the beginning, you are investing realistically, and maybe that will help in a funny way. All the world is a stage. There are more things in heaven and earth, Horatio, than are dreamt of in your philosophy.
peter_s
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Re: Why do we believe in the market?

Post by peter_s »

a small aside: from 1950 to 2015 -- S&P from 20 to 2000; CPI index from 23.5 to 236.5;real gdp percapita: 13819 to 51023
nominal price growth: 7.3%; inflation: 3.6%; Net(real) price growth: 3.6%; per cap gdp growth: 2%;
Real total return ( dividends reinvested): 7.2% (dqydj.com)

edited to include S&P total return.
Last edited by peter_s on Mon May 23, 2016 4:49 pm, edited 1 time in total.
mptfan
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Re: Why do we believe in the market?

Post by mptfan »

Shallowpockets wrote:Stock market is the only game in town. That is why we play. Unless you just keep cash, which is, in part, not a bad idea.
This is not true. You can invest in individual corporate bonds, or treasury bonds (e.g. Savings Bonds), or municipal bonds, or bond funds, or certificates of deposit, or annuities issued by insurance companies, or directly owned real estate (commercial or residential properties, not REITs), or physical commodities (like gold or silver or platinum) or directly invest in a business not traded on the stock market, or start your own business.
humanities
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Re: Why do we believe in the market?

Post by humanities »

In the long run, returns for equity investments tend to equal the starting dividend rate plus the dividend growth rate. (This is my layman's understanding of the Gordon growth model. Am I getting this right?) Thus, we should be optimistic or pessimistic about long-term returns for the stock market as a whole depending on whether we are optimistic or pessimistic about long-term dividend growth for the stock market as a whole.

There is one reason to expect dividends to grow more slowly in the 21st century than they did in the 20th: population growth is slowing down. Dividends can only grow in the long term if revenue grows. The aggregate revenue of all corporations can increase only if the number of consumers increases or if aggregate revenue per consumer increases. In the coming century, corporations are going to have to rely less on population growth for increased sales and revenue.

Are there reasons to expect dividend growth to be negative in the 21st century? Unquestionably, there could be events that devastate corporate revenue and corporate dividends. There could be another world war, or a plague, or political instability, or an environmental catastrophe. I don't know how, if at all, investors can plan for these possibilities. If there is a world war or a plague, or if the United States collapses into anarchy, my financial well-being be the last of my worries. If the U.S. has a socialist revolution, we'll all be in the same boat; either the new system will work or it won't. The only one of these events that's predictable is environmental harm; we know that climate change is happening. But we don't know how bad its effects will be, and I don't know what I as an individual can do to prepare for it. (Avoid buying beachfront property, I guess.)

I save and invest on the assumption that capitalism is likely to survive longer than I do, but that growth is likely to be slower than it has been in the past. If I thought either that economic growth would be high or that the end of capitalism was imminent, I'd probably save less and spend more.
garlandwhizzer
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Re: Why do we believe in the market?

Post by garlandwhizzer »

notsobright wrote:
In the end, aren't we all just gambling since we don't know for certain what the market will be like? We're all assuming that the market will have positive returns over the course of our lifetimes. Is that a safe assumption?
The only thing that you know with certainty about the future is that at some point you're going to die. That is the only certainty when it comes to predicting the future and, while completely true, it is not a pleasant prospect to contemplate. We all seek complete certainty in life and investing but, unfortunately on this planet it is not available other than that.

Tradeoffs are necessary in investing just as they are in life. Gambling is a zero sum game. Someone wins, someone loses and every bet. The stock market at least historically in the US has not been a zero sum game. Basic stock indexes tend to go up over time and throw off dividends as they go, with ups and downs along the way but the long term direction has historically been up in the US. There are reasons behind this, why the economy grows: population growth and labor productivity growth due to technological advance, which underlie corporate profit growth and therefore stock market gains. These factors are not guaranteed with certainty to persist in the future forever. However if you intend to grow your assets over a lifetime, risk/reward tradeoffs are necessary. It is not perfect and bulletproof but it is is the best that reality affords us in my opinion. Equities, fixed income, and real assets are our alternatives. If you wish for long term gain these appear to be better alternatives than gambling at Vegas. Choose a mix that suits your goals and risk tolerance. If fear of the future paralyzes you, you may not lose but you certainly won't gain.

Garland Whizzer
691175002
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Re: Why do we believe in the market?

Post by 691175002 »

notsobright wrote:why are we all so confident that the market will do us right over the long term? What if long term is not on the time span of decades, but of centuries.. What if the next 100 years is a bear market which is then followed by 200 years of bull. In the end, aren't we all just gambling since we don't know for certain what the market will be like? We're all assuming that the market will have positive returns over the course of our lifetimes. Is that a safe assumption?
What do you consider to be a safe store of wealth? Cash? Guns?

Cash is a horrific investment over the long term, inflation will destroy almost all of its value over time. This outcome is virtually guaranteed, since any prolonged stretch of severe deflation will probably lead into severe social/political consequences.

Guns are illiquid, have high storage costs, and essentially only pay off if society implodes.

Over the long term equity is actually one of the safest stores of value.
TomCat96
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Re: Why do we believe in the market?

Post by TomCat96 »

notsobright wrote:why are we all so confident that the market will do us right over the long term? What if long term is not on the time span of decades, but of centuries.. What if the next 100 years is a bear market which is then followed by 200 years of bull. In the end, aren't we all just gambling since we don't know for certain what the market will be like? We're all assuming that the market will have positive returns over the course of our lifetimes. Is that a safe assumption?
If you work hard at something all your life, do you believe that you will produce something of lasting value? If so, why do you believe that?

If I am a craftsman, and I do nothing but spend my life working on my house, can I cause that house to increase in value due to my invested labor?
Now take those efforts and multiply it by several billion. Now let's sell "shares" of the ownership of the fruits of this labor.

Do you believe you will get something more than what you started with in the end? That is the foundation of why we believe in the market.

Sure disaster may strike a few houses, a few companies might have been defrauding investors, but the question remains, collectively do you believe that those craftsmen will over time, produce greater value than what they started with?

I picked a house analogy because it's a little easier to see the "market growth" when the growth in value is literally the value of home improvements. It's tangible. It makes sense. But clearly the endeavor doesn't have to be houses. It could be factories, engines that divert skilled labor, firms, etc. Of course as an investor you are at liberty to choose which markets to invest in. But those of us here who believe in the market in its entirety has implicitly said we believe in the whole of the human experience to generate value in by the fruits of our labor over time.

Those of us who are well diversified across asset classes, companies, and even countries have said implicitly & philosophically, the whole damn thing will grow and blossom over time, warts and all.
Karamatsu
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Re: Why do we believe in the market?

Post by Karamatsu »

In the end, aren't we all just gambling since we don't know for certain what the market will be like?
Yes. People come up with all sorts of rationalizations (as you've seen), but if you scratch the surface it's just hope, often built on self-deception, which in turn may be built on layers of deceptive marketing produced by the finance industry's media arm. Small common stockholders don't "own" companies in any meaningful way. Passive index investors, in particular, don't even get to vote. Equity prices are not driven by corporate earnings, they're driven by supply and demand, actuated by (for the most part) gamblers placing bets on electronic tokens. Of course the gamblers have a story. Go to a casino. They always have a story... a reason they use to convince themselves to give their hard-earned money to the house, and the house happily obliges with good customer service. Fundeamentals gamblers over here, technical gamblers over there. Passive indexers say that both those groups are fools then we bet our life savings on the average of what those fools do. We sagely intone that past performance does not predict future returns, then promptly forget it, because otherwise it would make all of the data analysis and back testing and finance books ("Stocks for the Long Run!") useless, as well as (garbage in, garbage out) optimizations based on them.

But most of us are trapped. It's hard to avoid politics entirely because it's integral to the question. I leave any redactions to the judgment of the moderators, but we live in societies structured to benefit the wealthy. Real wages for US manufacturing workers have not risen since the 1960's, and most countries don't provide an adequate safety net. What to do? Safe bond yields are dismally low, so either we convince ourselves that the equity market is somehow an intelligent place to put our money in hopes of securing a more stable future (there are both more and less intelligent ways to gamble, most certainly), or we recognize that it is all just gambling and pray that we can take our profits and get out before things unravel. On any given day, the mechanisms of the equity market are really no different from what happens during a bubble. Just more diffused. But the goal keeps receding. It would be an endless treadmill if not for the certainty of death!

So anyway, yeah. Gambling. But you have to decide. And you don't have to gamble irrationally. Look at bonds. Look at land/house. Invest in yourself (your skills, your education, your knowledge/experience). Don't bet it all on the spinning wheel.
rgs92
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Re: Why do we believe in the market?

Post by rgs92 »

I buy stocks so in the future I can buy things.
If I want to buy $100 worth of food 20 years from now, chances are $100 worth of a basket of food stocks will buy me the same food that $100 in cash will buy me now.
If the food happens to cost the same in the future, I am confident the basket of food stocks will we worth at least the same, so there is no problem.
In summary, stocks track what I need to buy, up, down, or sideways.
What more could I ask of an investment?
The total stock market includes the stocks of companies that make everything I want to buy.
Thus, I don't really care what the stock market does in the long run and I sleep well on top of my big pile of stocks.
Sleep tight.
wolf359
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Re: Why do we believe in the market?

Post by wolf359 »

Shallowpockets wrote:Stock market is the only game in town. That is why we play. Unless you just keep cash, which is, in part, not a bad idea.
Someone here posted about when they started investing in 1950. Maybe they are 85 now and have looked at 65 years of returns. For most of us I believe it to be a market that has been 'investible' since about 1990. Even then it was not an investing world on a large nor easy scale. You had brokers, trading fees were much higher, funds were fewer, many if them front end load. There was no Internet. You had to follow prices in the newspaper. Now it is much simpler in those regards. Maybe more complex in the choices.

This BH usual long term returns rising and periods of 20-40 years is suspect in light of the above. Now there are so many more investors, so many more funds, companies, etc. although you can look at historical returns going back I believe that some of that does not apply to today's world.
Although the past few years have been a bull market, we only arose out of the big slump in 2008. Now getting back to even for many.
Another thing is that if you are looking ahead from 30-40 years old you have a different perspective on your money than a newly retired person. You can have the long view. If you are still contributing to your savings you can have the long view. The rest of us, not so much. We have our X amount and we see very little movement some recent years. Historically, it may even out to the proverbial 8% a year, but that has not been much of a sure thing since 2000.
Still, the stock market is our only game. Bonds, annuities, these are all predicated on the stock market.
We are captive by this machine. No pensions anymore. So you are either in the dynamic phase and making money, or you are in the static phase and watching your X amount roll around in that machine. We take solace in the longer view or averages. But, we do not know it will go that way, or when.
I am investing in the market (which I'm defining as stocks and bonds), but I disagree that it is the only game in town.

I have my doubts as to whether or not I'm going to get market returns that are similar to those in the past. Therefore, I am keeping a healthy portion in bonds, increasing my overall savings, and saving as much as possible. I hold a percentage of international stock index funds as well to diversify away from the US.

I am planning to maximize my social security by delaying claiming to 70. Social Security is not market based. Even if the benefits get cut by 25% by the time I claim, it's a significant non-market income stream.

I am holding some rental properties for cash flow.

I am on the fence as to whether to get a SPIA when the time comes. It depends on how the markets are doing. I may divert some funds from the market to an annuity when interest rates get better.

I am willing to work part time or keep my job longer if my retirement plans don't pan out. I will probably keep working after I make my numbers, because I like my job.

I maintain several contingency plans for radically reducing spending or raising funds if certain disasters strike. These allow a reset and stay flexible if necessary.

Realistically, however, if I am executing the last of my contingency plans, the world will be in very bad shape.
MrKnight
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Re: Why do we believe in the market?

Post by MrKnight »

notsobright wrote:why are we all so confident that the market will do us right over the long term? What if long term is not on the time span of decades, but of centuries.. What if the next 100 years is a bear market which is then followed by 200 years of bull. In the end, aren't we all just gambling since we don't know for certain what the market will be like? We're all assuming that the market will have positive returns over the course of our lifetimes. Is that a safe assumption?
It's certainly possible. Following the collapse of Rome there was 500 years of dark ages for western Europe. Incredibly slow almost flat trending growth and development has been the norm for most of human history. Only within the past 1 or 2 centuries has continuous upward trending growth become the norm.

A asteroid can hit the earth tomorrow and wipe out most of civilization.

That said, pretty much any scenario that would destroy the market would effectively destroy another type of investment including cash and gold with the potential exception of canned food, water, guns, and ammo.
APB
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Re: Why do we believe in the market?

Post by APB »

notsobright wrote:aren't we all just gambling since we don't know for certain what the market will be like? We're all assuming that the market will have positive returns over the course of our lifetimes. Is that a safe assumption?
Gambling is an optional activity. We are making educated guesses based on the available information. Dodging the stock market is "gambling" on another asset class. (Eg. Bonds, cash, land, gold). We don't need to know for certain what the stock market will do over our lifetimes for us to allocate a portion of our portfolios to it. Somewhere between 2-6% annual real returns seems like a safe assumption. (I have about 65 years of investing left in my life).

Assuming positive returns over one's lifetime depends on one's age. The more years we have left, the more likely it is for returns to be positive. It's a balance between the long term tailwind of earnings vs. the temporary swings of stock price.

I'm 100% in equities, so in about 65 years, when I die, you can come back here and make fun of me if I'm wrong and lost money. :sharebeer
My posts represent my own opinion and do not constitute financial advice. I am simply a hobbyist. :)
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Re: Why do we believe in the market?

Post by tludwig23 »

I consider myself to be agnostic to the market. I am in a sense gambling, but the gambling is based on long-term trends and economic theory. The market, in my opinion, has a greater long-term reward for unit risk than any other asset class. Nothing is guaranteed. The market is not guaranteed, but neither are any alternatives.
That's what I do: I drink, and I know things. --Tyrion Lannister
Ari
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Re: Why do we believe in the market?

Post by Ari »

While nothing is guaranteed, there are also great positives. Let's not forget about them.

The last 100 years have seen some great returns on equity, and the last 100 years have been very chaotic. Depressions, recessions, world wars, revolutions and disasters. And yet the returns have been good.

Looking forward, we can notice that the geopolitical trends are favorable. War is on the verge of extinction; the risk of dying a violent death has been steadily declining for centuries. Poverty is also quickly diminishing (and that means new markets). Technological progress is rapid and our societies are changing.

Again, nothing is certain, but I'd wager the 21st century is going to be a lot nicer to live through than the 20th was. There are other potential new disturbances, of course. I'm not going to harp on about curing aging again, but when that happens, that's going to change the retirement game for sure. And sooner or later we're likely to cure work, too, which is going to change everything.

But yeah, in the long run, I'm definitely an optimist. But of course it's risky. That's why they pay us. People don't give away money for free.
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bottlecap
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Re: Why do we believe in the market?

Post by bottlecap »

notsobright wrote:In the end, aren't we all just gambling since we don't know for certain what the market will be like?
Gambling is, at best, random. The market is not gambling in that sense. There are good theoretical reasons to think it will produce a positive return over time. Of course it's not guaranteed. If it were, it would historically return slightly less than treasuries.

Nothing else is guaranteed, either. Inflation can devastate fixed returns and make a stagnant stock market look like a dream.

Every investment decision has risk. It's just a lot more evident in the short term with the stock market, so you've taken notice.

JT
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Re: Why do we believe in the market?

Post by JoMoney »

Why do we believe the sun will come out tomorrow? Why are we so confident the sun will shine again at some point in the future?
If I plant a seed that I could eat today, am I just gambling that it will be able to grow into something more since we don't know for certain if it will sprout and grow to bear any fruit?
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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burt
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Re: Why do we believe in the market?

Post by burt »

In this thread I've read that businesses have to grow. Why ?

Example:
Suppose I have a small business that provides $50,000 income per year (adjusted for inflation).
I'm happy with that, and will only invest enough into the business to produce $50,000/year for 40 years.
At the end, I sell the business for whatever it's worth. Done.

Again, why do businesses have to grow ?
Infinite growth doesn't seem possible in a finite world.

burt
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Re: Why do we believe in the market?

Post by BogleMelon »

burt wrote:In this thread I've read that businesses have to grow. Why ?

Example:
Suppose I have a small business that provides $50,000 income per year (adjusted for inflation).
I'm happy with that, and will only invest enough into the business to produce $50,000/year for 40 years.
At the end, I sell the business for whatever it's worth. Done.

Again, why do businesses have to grow ?
Infinite growth doesn't seem possible in a finite world.

burt
When a business choose to not use the profit dollars to expand anymore, then you as an owner claim these profits. In your example, the $50,000 is going straight into your pocket as a profit (assuming you meant that the $50,000 is the net profit not just sales). Same thing in the stock market, if a big company are not expanding anymore and just recognizes its profits, then you as a stockholder will get at the end of their fiscal period (end of the year) what is called as dividends. You can choose either to get these dividends (your profit share) in cash or reinvest them in more stocks to get more dividends (more dollars) the year after.

So again to summarize this, even when the business can not grow anymore (and the stock value remains almost the same over years), the business is still profitable (otherwise why would they operate?) and these profits go directly into the stockholders pocket in a form of dividends.
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather
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Re: Why do we believe in the market?

Post by bottlecap »

burt wrote:In this thread I've read that businesses have to grow. Why ?

Example:
Suppose I have a small business that provides $50,000 income per year (adjusted for inflation).
I'm happy with that, and will only invest enough into the business to produce $50,000/year for 40 years.
At the end, I sell the business for whatever it's worth. Done.

Again, why do businesses have to grow ?
Infinite growth doesn't seem possible in a finite world.

burt
They don't have to. We can do things to prohibit growth. But humans usually strive to better themselves. And the rest of us aren't competent enough to stop it, no matter how hard we try.

Maybe infinite growth isn't possible. But there's no indication that we'll hit that wall within our lifetime or any where close. Has technological growth slowed and I missed it? :wink:

JT
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Re: Why do we believe in the market?

Post by Dirghatamas »

burt wrote:In this thread I've read that businesses have to grow. Why ?

Again, why do businesses have to grow ?
Infinite growth doesn't seem possible in a finite world.

burt
Fair, but even in that case, holding diversified stocks should turn out very positive. Lets just take your example and diversify it to the world. Lets say human population becomes steady from today onwards so deaths/babies born cancel out. Lets say productivity growth stops today and no new technology is invented from here on out. Very boring world but one of the possibilities of "secular stagflation".

You hold X% of the world's businesses today. Each year they will continue to make some profit. Given in this static world, companies need to invest very little in growth (just to maintain their infrastructure), most of the profits will come as dividends or buybacks to you. Lets ignore taxes and assume you reinvest dividends.

Each year, your X% of world's businesses grows to a higher %: by the amount of dividends/buybacks. If you lived to be a million years old, you would own the entire world's businesses :twisted:

This is the key point: stocks are NOT like commodities which have no inherent, intrinsic rate of return, just a speculative one. Assets like businesses, farms, real estate etc produce yearly returns, which if reinvested will cause growth of one's assets EVEN if the world doesn't grow at all, because you will simply own a bigger % of non-growing assets.

Also note that the world where there is no growth will have very little need for capital so the risk free rate will probably be 0 and there will likely be no inflation. As such, comparatively speaking, your investments in stocks will look great.
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Re: Why do we believe in the market?

Post by Wildebeest »

MrKnight wrote:
notsobright wrote:why are we all so confident that the market will do us right over the long term? What if long term is not on the time span of decades, but of centuries.. What if the next 100 years is a bear market which is then followed by 200 years of bull. In the end, aren't we all just gambling since we don't know for certain what the market will be like? We're all assuming that the market will have positive returns over the course of our lifetimes. Is that a safe assumption?
It's certainly possible. Following the collapse of Rome there was 500 years of dark ages for western Europe. Incredibly slow almost flat trending growth and development has been the norm for most of human history. Only within the past 1 or 2 centuries has continuous upward trending growth become the norm.

A asteroid can hit the earth tomorrow and wipe out most of civilization.

That said, pretty much any scenario that would destroy the market would effectively destroy another type of investment including cash and gold with the potential exception of canned food, water, guns, and ammo.
Actually the dark ages lasted a millenium. I also take exception to an astoroid hitting earth tomorrow ( may be in a few years). But otherwise MrKnight expresses my sentiments exactly and more eloquently.

At one point I was seriously considering to put my stash in real estate and leverage up to the hilt. Work every tax advantage to having a real estate management company. My final assesment was that would take a whole lot of effort and taking much more risk than putting your money in low cost index funds.
The Golden Rule: One should treat others as one would like others to treat oneself.
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Re: Why do we believe in the market?

Post by tetractys »

HomerJ wrote:Human work is turned into profit.

Owning the market means you get a share of those profits.

It's not a closed system. Human work is the input into the system.
Oiled by fossils, solar energized, fauna, flora, and mineralia enhanced? -- Tet
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Re: Why do we believe in the market?

Post by wolf359 »

JoMoney wrote:Why do we believe the sun will come out tomorrow? Why are we so confident the sun will shine again at some point in the future?
If I plant a seed that I could eat today, am I just gambling that it will be able to grow into something more since we don't know for certain if it will sprout and grow to bear any fruit?
The sun coming out is physics. It's predictable and testable.

The garden analogy is better. It's life. If provided correct amounts of sunlight, nutrients, and water, a seed should sprout and bear fruit. However, any number of things could still go wrong.

My first year of growing strawberries, I planted six. I lost them all to birds and other pests. My second year I planted 125. Despite losing a third of the crop to foragers, I had plenty for my family.

It's interesting that the Pareto Principal applies to plants as well as investments. 80% of your results come from 20% of your plants.
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Re: Why do we believe in the market?

Post by JoMoney »

wolf359 wrote:
JoMoney wrote:Why do we believe the sun will come out tomorrow? Why are we so confident the sun will shine again at some point in the future?
If I plant a seed that I could eat today, am I just gambling that it will be able to grow into something more since we don't know for certain if it will sprout and grow to bear any fruit?
The sun coming out is physics. It's predictable and testable.
...
The confidence people have that the physical events bringing out the sun will continue uninterrupted is simply that its happened many, many, times before. They may feel well supported in the conclusion that it will come out tomorrow, but there are other physical phenomena that could suddenly impede what you believe is predictable. Stars can go supernova, the atmosphere could become blotted out with volcanic ash, probably other things we can't even imagine. The turkey believed the farmer feeding him was his friend all the way up to Thanksgiving day.
Don't get me wrong, I wouldn't bet that the sun won't come out tomorrow... and when it comes to options for investing money, I'm not going to bet against owning businesses either. The OP asks "is that a safe assumption" I think it's safe to say we don't know what the future brings, but we have to make decisions anyway based on what we know today.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Why do we believe in the market?

Post by protagonist »

JoMoney wrote:
wolf359 wrote:
JoMoney wrote:Why do we believe the sun will come out tomorrow? Why are we so confident the sun will shine again at some point in the future?
If I plant a seed that I could eat today, am I just gambling that it will be able to grow into something more since we don't know for certain if it will sprout and grow to bear any fruit?
The sun coming out is physics. It's predictable and testable.
...
The confidence people have that the physical events bringing out the sun will continue uninterrupted is simply that its happened many, many, times before. They may feel well supported in the conclusion that it will come out tomorrow, but there are other physical phenomena that could suddenly impede what you believe is predictable. Stars can go supernova, the atmosphere could become blotted out with volcanic ash, probably other things we can't even imagine. The turkey believed the farmer feeding him was his friend all the way up to Thanksgiving day.
Don't get me wrong, I wouldn't bet that the sun won't come out tomorrow... and when it comes to options for investing money, I'm not going to bet against owning businesses either. The OP asks "is that a safe assumption" I think it's safe to say we don't know what the future brings, but we have to make decisions anyway based on what we know today.


-We have rock solid theoretical knowledge of how the sun, and other stars, work. We know what the sun is made of, we understand nuclear fusion, we know how hot it is, we know its distance from earth, we have a good solid idea of its mass and when its fuel will expire based on equations that apply to all stars. We have solid evidence from not only our sun but every other star we have studied that confirms our theories. We know the velocity of the earth's orbit and its rate of rotation about its axis, its path around the sun, and its distance, and from that alone we can accurately predict when the sun will "rise " on any given day with incredible precision. We have eons of data that solidly confirm our rock-solid theories. Our equations have predicted the "exact" position of the sun in the sky at any given hour or minute or second and to date have always been correct. We have no such testable hypotheses or equations to predict market behavior, even for tomorrow, or a minute from now, no less into the more distant future. Market behavior is complex, nonlinear, and affected daily to a great extent by random events, whereas the earth's behavior around the sun can be deduced at any given time with extreme accuracy by simple algebra and geometry.

-In the case of sunrise, we have billions of years of solid evidence that it works on a daily basis...billions of data points.... and thus we can say with an extremely high level of confidence that the sun will rise again tomorrow. The chances of us being wrong are miniscule. But if you were born three days ago, and all you knew was that it rose three days in a row, and you had no good scientific theory or explanation why, could you confidently say that it would rise tomorrow? Of course not....you would be guessing. It would be like flipping a coin, getting three heads in a row, and thus knowing you would get a head on your fourth flip. But that is what we are doing when we try to predict market behavior 30 years into the future based on approximately 90 years of data, and no rock- solid mathematical explanation or theory explaining why it has behaved the way it has for the past 90 years....just data points. If we had thousands or millions of years of confirming evidence, that would be different. But in fact, if you go back far enough, the evidence contradicts the idea that there will be growth, say, over any given 30 year period or century. It took the European economy well over a millenium to recover after, say, the second or third century AD, and when it did, it did in fits and starts. The past century or two have been remarkable in terms of economic growth and very different than most, if not all, others. In the next century, will the economy behave in any vaguely similar fashion? Your guess is as good as mine.
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Re: Why do we believe in the market?

Post by protagonist »

Another way to think about it:

I think we can all agree that the direction of the market is not predictable in the short run. We don't have much of an idea whether it will go up or down in the next minute. Or tomorrow.

I think we also can all agree that the direction of the market is not predictable in the very long run. I mean centuries. Do you have any clue as to whether the market will be higher or lower than it is today in the year 2300, or 2500, or 3000, or 30000, or 3 million, or even if it will still exist? Of course not. Any one of a number of things could happen in the interim. We could develop technology to solve all the world's problems, or on the other hand, civilization might be reduced to ruins.

But there are those who think that we can, with great confidence, predict that the market will go up in the intermediate future, that we define as within our investment lifetime. Say 20-60 years. Those same people would, I think, agree that the direction of the market within the next hour, or over the next thousand years, is unknown.

Can you think of ANY mathematical function that cannot make reliable predictions both in the short run and the long run, but can make reliable predictions in the intermediate run? I'm not a mathematician....perhaps such a function exists....but if it does it eludes me.

Uncertainty compounds over time.
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Re: Why do we believe in the market?

Post by oldzey »

I believe in charts.

Image
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Re: Why do we believe in the market?

Post by bjr89 »

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Last edited by bjr89 on Fri Nov 16, 2018 8:02 pm, edited 1 time in total.
protagonist
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Re: Why do we believe in the market?

Post by protagonist »

oldzey wrote:I believe in charts.

Image
Don't believe in every chart you see.

This one shows less than 50% real appreciation in the S+P between 1871 and 1949. http://www.advisorperspectives.com/dsho ... trends.gif

Your chart shows about 10000% real appreciation in "stocks" (whatever that means) between those years.

Which do you think is more realistic?
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Re: Why do we believe in the market?

Post by garlandwhizzer »

bjr89 wrote:
Something that seems to elude many people is that stocks fell almost 90% from peak to trough due to the Great Depression, and they didn't recover to the previous high until 1954. There is no reason this couldn't happen again -- and it could take longer to recover, or never recover at all.
That long period of losses until 1954 does not include the effect of reinvested dividends. The idea that stock investors who stayed the course did not recover until 1954 is simply wrong. For those investors who held on to their stocks and reinvested their dividends by buying more shares in the Great Depression, their losses were fully recovered in less than 8 years, not the 25 years mentioned above. Dividends were paid out at a much higher rate in that earlier era than they are today. Stock prices were hit drastically in the Depression and reinvested dividends bought a lot of stock at greatly discount prices if you held on. Recovery for investors in my view means erasing your real monetary losses rather than stock prices recovering to their prior highs which took until 1954. The more likely risk for US investors is not that the market will tank and destroy their wealth for decades on end but that they will panic sell during a collapse and become so emotionally shaken that they will avoid the market completely for decades. That behavior and not market per se is what has historically been the greatest destroyer of investor wealth in the US.

Investor behavior not market volatility is the single greatest risk to future returns in my opinion. I once read somewhere that Charles Schwab studied their clients portfolios to determine the factors which defined the most successful investing group over time. They were shocked when they attempted to notify the winners. Those with the best long term returns often had one thing in common: they had died long ago and therefore made no adjustments to their portfolios.

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Re: Why do we believe in the market?

Post by baw703916 »

oldzey wrote:I believe in charts.

Image
I'm going to put 100% of my portfolio into trends. Same return as stocks, but none of the volatility!! :moneybag
Most of my posts assume no behavioral errors.
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Re: Why do we believe in the market?

Post by bertilak »

The stock market is a relatively easy way to participate in free market capitalism. If you believe in free market capitalism the stock market is for you.

A more difficult, but potentially more rewarding, way to participate in free market capitalism is to build a profit-making business.
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Re: Why do we believe in the market?

Post by JoMoney »

protagonist wrote:...Don't believe in every chart you see.
Good advice
protagonist wrote:...This one shows less than 50% real appreciation in the S+P between 1871 and 1949. http://www.advisorperspectives.com/dsho ... trends.gif
I hope you're using that as an example of a bad chart, it fails to include dividends.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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